Currency VII: Alternative Currencies

Our currency options aren’t just limited to a traditional fiat currency as explored over the last five parts of this series. There are emerging currencies and monetary systems that may challenge, replace or (more likely) be used alongside traditional currencies.

Every 1 unit of local currency needs to be backed by 1 unit of legal tender, whether in a bank account or credit union.

Can exist in physical (note/coin) form as well as electronic.

Participating businesses are usually charged to convert the local currency back into legal tender (in order to keep it circulating).

The idea behind local currencies is to retain spending power within a community to benefit local businesses – known as the local multiplier effect. Customers can only spend the money at participating businesses, and those businesses, in turn, will have to use the local currency to buy goods and services from local suppliers.

Perhaps the most famous example of a local currency is the Bristol Pound (£B), which not only has notes but an electronic means of payment. Research in 2014 (pdf) revealed 4% of spending in the city was done in £B, most of which went to independent local businesses, while Bristol City Council has since allowed people to pay council tax and other bills using £B.

The key advantage of local currencies is you reduce the size of supply chains. This can be very good for the environment and, to a certain extent, insulates the local economy from national and international economic shocks.

The big downside to local currencies is their use is limited; it’s impossible to get something like a mortgage or loan in local currencies, similarly it’s difficult to build up savings, while major national and international chains and franchises are unlikely to accept them.

So it can’t replace a mainstream currency but it could certainly complement them and be a way of both rewarding “hidden work” (i.e. volunteerism, unpaid overtime) and keep spending power within a community – no doubt a very good thing for Welsh high streets.

The currency is decentralised and not backed by any central bank, government nor tied to commodity prices.

Transactions are usually anonymous, peer-to-peer, irreversible and recorded in a digital public ledger (blockchain) to verify ownership via a private key.

The blockchain/transaction confirmation is maintained by “mining”, where different computers have to agree on the order of transactions and their place in the blockchain. People who successfully “mine” are rewarded with some of the currency.

Popular cryptocurrencies include Bitcoin, Dash, Dogecoin and Monero.

Cryptocurrencies have seen an explosion in interest since Bitcoin was launched in 2009 when confidence in traditional fiat currencies (Part I) was hit following the Great Recession and bank bailouts. As a result, cryptocurrencies have been promoted by libertarians who oppose government interference in the free market and monetary policy.

Cryptocurrencies are technically fraud-proof as they can’t be forged. Also, there are no delays due to third party involvement (including the government and regulators), there are practically no transaction fees and….you own it completely – it can’t be taken away from you and your account can’t be frozen.

Nonetheless, there are issues. Cryptocurrencies like Bitcoin have experienced massive price volatility, with its real world value ranging from $800 in January 2017 to more than $2,500 in May 2017. They’re also linked to criminal activities on the “dark net”, such as ransomware or black market sales of weapons, personal data and drugs – so don’t have the best of reputations yet.

It’s certainly possible that Wales could switch wholesale to a cryptocurrency or even start our own – we wouldn’t have to worry so much about things like exchange rates, for instance. But it would have to be centrally controlled to….you know….do “inconvenient” things like collect taxes – which goes against the ethos of cryptocurrencies (though they are liable to capital gains tax).

For the foreseeable future, they’re likely to remain an internet phenomenon, but I don’t see why they couldn’t be recognised as a valid means of payment, but without the status of legal tender or coming under the protection of the central bank (i.e. deposit protection schemes).

Gold Standard

The value of the currency in circulation is backed by a fixed weight of gold held by the central bank. So you would be able to exchange a paper note for a certain amount of gold.

For example, if the price of gold (or silver) were set at £10 per gram, the value of £1 in circulation would be 100mg of gold (or silver).

The gold standard was abandoned by all countries by the mid-20th century and replaced with fiat currencies.

Do you want to go back to the good old days of the 1840s? Then returning to the gold standard’s just for you! Creating fiat money has led to the greatest expansion in individual prosperity ever because most gold and silver is held privately and there simply isn’t enough of either around to underpin a modern consumer society.

The option tends to be popular with right-wing libertarians, conspiracy theorists and survivalists because they have no faith in a government-backed list of numbers on a screen, while “gold is real”. It does, nevertheless, have some advantages: it controls inflation because the government or central bank can’t control the monetary supply, this, in turn, helps keep prices stable because it gives gold miners an incentive to keep mining.

Returning to the gold standard will be difficult if not impossible. As mentioned, there isn’t enough of the stuff in the first place – so there would be nowhere near enough to cover the value of all the currency in circulation. Plus, gold mining is terrible for the environment and an inefficient allocation of resources when we can just print or mint the money and/or type numbers on a screen. Lastly, the gold standard is mostly incompatible with modern financial products like stocks and shares, pension funds, derivatives etc.

In short, gold should be kept for jewellery and is of more use in electronics than as a currency.

Participatory Economics (ParEcon)

Workers would be compensated based on the relative “effort, skill and sacrifice” required for their role, not the market value.

Workplace structures are re-organised so everyone takes part in “high-value work” (i.e. accounting, administration) as well as “low-value”, dangerous and uncomfortable work (i.e. cleaning, mining). This is known as a “balanced job complex”.

Prices are based on the resources and labour that go into a product or service. Instead of preparing a tax return, everyone prepares an annual consumption plan so industry and public services know how much to produce or provide in a given year and set indicative prices.

The currency under a ParEcon system is non-transferable and disappears once spent.

Participatory economics is a libertarian socialist/anarcho-socialist philosophy that’s neither a full blown planned economy nor an entirely free market – it has elements of both. Decision-making would switch from market phenomena to individuals, while workplace structures and the monetary system change from one based on market value to a more balanced system based on “doing a little bit of everything” (work wise), fair prices and payment based on how hard and/or valuable a job is.

You would assume the currency under this system would be an electronic system of credits (similar to time credits) and you would be paid based on your individual needs, how hard your job is and how long you work. So under this system a socially-necessary but unglamorous or even dangerous job – like a care assistant or refuse collector – would be paid more than a professional footballer, doctors would be paid more than administrators etc.

The pitfalls include the massive amounts of administration and bureaucracy required – probably to a level that would make filing a tax return seem like primary school homework – which would fall squarely on everyone. Also, if everyone isn’t doing their desired job part-time (because they want a balanced job complex) then the economy, arguably, becomes less efficient because you’re not making the best use of labour.

Social Credit

Based upon a belief that the population doesn’t earn enough to buy the products they produce. This is a gap caused by profits, shareholder dividends, savings and investments. This gap is filled by money borrowed into existence through the creation of debt.

A centralised Social Credit Office would create debt-free money to pump into the economy, closing the gap between production and consumer spending power – either through national price discounts or a national dividend.

Essentially, it’s a form of universal basic income, not strictly a currency – but it would require a non-fiat currency to work (Part I). Fiat currencies are, essentially, created from debt and from thin air.

Social credit sounds like a good idea, but it fails basic economics. It would require price controls – which rarely work – and pumping money into the economy is only likely to result in rampant inflation, not a closing of a gap between production and consumer spending power.

It could work if we moved away from a consumer economy; interest is a necessary form of security against debt defaulters, for example.

A moneyless society?

I’m not talking about a cashless society – where a physical currency is replaced by digital currency and is likely to happen in the next few decades anyway – I’m talking about a society without a currency at all. It could develop in several ways.

Firstly, we could return to a barter economy, where you exchange what you don’t need (or what you can offer, like labour) for things you do need. Realistically this would only happen if the current economic system completely breaks down.

Secondly, currency as we currently know it could be replaced with another medium of exchange. For example (similarly to ParEcon – above) you could get “time credits” for performing certain tasks based on a formula that includes pre-requisite qualifications, effort, sacrifice and social necessity, not necessarily the market value of what you’re doing.

Thirdly, we could end up with a Star Trek style post-scarcity economy, where everyone’s basic material needs (food, shelter, transport, energy) are taken care of through cheap and readily accessible technology so you don’t need money as you’ve eliminated a large part of the purpose of money.

For example, if you want food or clothes, you don’t need to buy them in a shop as they can be replicated in your own home using re-sequenced atoms. Everyone would “work to better themselves and the rest of humanity”….in theory.

With increased automation potentially reducing the cost of many goods and society becoming more efficient at recycling, this sort of economy is on the cusp of being possible in the next century or so – but it’s not practical yet.

Last, but not least, Part VIII looks at all of the (serious) options again and tries to determine which one’s the best for Wales?